“A cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank specifically in its creation and growth” http://gromek.co/cryptocurrency. For purposes of this article, we shall be concentrating on bitcoin to represent all the cryptocurrencies that are being developed with each new day.
Bitcoin was founded by Satoshi Nakamoto January 3, 2009, and has been on a roll (for most of the time), ever since then.
Queries arise as to whether bitcoin is genuine, whether it can replace other existing fiat currencies, is it over hyped? Should we go all in on it? These and many more are the questions many people ask, beyond the basics of what bitcoin really is.
Below are some of the pros of cryptocurrencies
Decentralized control. There isn’t a single entity that can set or change the bitcoin blockchain rules at will across the whole network as there is need for a consensus to problem solving when issues or problems do arise. This helps prevent a single point of vulnerability to the network/currency, though some syndicates have come together and seem to be ruling the network and negating this.
Low transaction Costs. Bitcoin transactions are ideally cost effective based on not providing services like dispute resolution, incorporated insurance against loss, service and management fees, and others that are often incorporated within existing financial systems.
Privacy in transaction implementation which makes personal information and transaction details secure and free from unnecessary third party interception.
Cons of cryptocurrencies
Decentralized control of bitcoin makes it hard and time consuming to rectify faults and breakdown should things go haywire. Following some recent hacks, there is a lot of voting, quibbling and mutual agreements before any reversals can be done should a theft occur. Once Bitcoins are sent, the transaction cannot be easily reversed as ownership address of Bitcoins will be changed to the new owner. It is upon the new owner(fraudster) to return the stolen funds.
Long arduous process to mine bitcoin. One needs Application Specific Integrated Circuits (ASICs)) which were designed specifically for mining bitcoin to effectively and efficiently make bitcoin. More to that, the difficulty of mining bitcoin increases with time as more miners get onto the network. Apart from this being an obvious pain, it also poses bigger supply problems later should bitcoin be adopted on a larger scale.
Computer security while mining bitcoin is decentralized as the miner is also the bank, which makes them highly susceptible to risk at their point in the block, which creates a vulnerability point for fraud and theft.
Low Transaction speed and verification in the of bitcoin network vis a vis existing systems, with a maximum of 7 transactions per second as at the time of writing this article.
Energy consumption to support bitcoin mining is often high and more often than not, the cost of mining bitcoin in relation to the energy costs is not worth it/ no return. Downloading bitcoin per block comes in every 10 minutes, the current size being 130 GB in 10 years, 3.5 TB.
Deflationary and can’t be fully relied on for economic sustenance. Per current Bitcoin protocol, Bitcoin production is capped to 21 million and no more will be mined after that number has been attained. It is also a long and arduous process to easily convert bitcoin to liquidity.
Difficult to track. This greatly increases privacy when compared to traditional currency systems, which makes it an easy vehicle for illegal activity funding and unscrupulous transactions to be conducted.
Trust. There are no regulations in place or clear guidelines/procedures/ legislation for crypto currencies, and the space lacks authentic independent analysis which makes it hard for the public and other stakeholders to adopt it, and even more difficult to know where to turn when things go wrong.
Fast evolving market, where new crypto currencies are coming up almost every week makes it hard to keep track and requires time to be well versed with them all, and determining which ones are real and which aren’t. Some of the current crypto currencies include bitcoin, ripple, litecoin, ethereum, dash, monero, auroracoin, titcoin, and many new ones coming up.
Difficult to understand process makes it hard for people to really understand it, which leaves room for many pyramid schemes to be built around it. Most third parties dealing with crypto currencies are eager to take advantage of the unsuspecting public that wants to be part of the hot deal in town.
Fraud; Since Bitcoin transactions are irreversible, scammers and fraudsters find them useful because people can collect payments and not deliver. Also, most of the major exchanges for buying and selling bitcoin exist on centralized servers, meaning all the information for users is stored in one centralized location and prone to attack.
Unfeasible; Some of the blockchain networks and cryptocurrencies being seriously touted are in pilot phases without clear or tested feasibility in the real world. The recent bitcoin split, with another coming and many more probably bound to arise, makes it is hard to determine whether it will one day have a sustainable, feasible solution set in place.
Political power within the Bitcoin ecosystem that comes with controlling mining power, since that mining power essentially gives you a right to vote on whether to accept changes to the protocol. If this is concentrated in one place, it will create a centralized effect that is against the decentralization selling point of blockchains and cryptocurrencies.
In an ideal setting/all factors being constant, below are some of the things that could be done to make crypto currencies feasible.
Production; Progress has and is being made, seeing the shift of bitcoin mining from using CPUs, to graphics processing units (GPUs), to FPGAs (write in full) to Application-Specific Integrated Circuits (ASICs) which were designed specifically for mining bitcoin. This shows progress from the teams that are working towards making the future of bitcoin production more feasible. There’s also need to locate near cheap power sources to minimize production costs. This may not be ideal for regions where energy for basic use is already rationed, say in the case of developing countries.
Scaling; The set limits and caps to bitcoin mining would have to be eliminated to enable feasible supply to an extent, perhaps let the market forces dictate its supply, this will require easing the production process as well so that more blocks and coins can be mined.
Skills; Currently, there’s a big skills gap in most innovative facets of technology, including blockchain and cryptocurrencies. Some of the ideal and necessary skills for a sustainable bitcoin workforce may include proper understanding of how currencies operate and the economics thereof, familiarity and experience with certain programming system languages like C/C++, understanding data security and anomaly detection, to mention but and few. And to top it all, this being a new thing, there will be plenty of room for trial and error before actual implementation in highly sensitive industry structures, especially in Finance.
Regulation; Setting of clear guidelines by which crypto traders can operate across the whole network so as to have reliable and widely accepted rules, and make it easy for culture adaptability. This, as one can imagine, is not something that most crypto evangelists would like as it’s one of the things they mostly want to avoid.
Standard operating procedures and legislation in place for the crypto currency/blockchain industry to provide a respite in case things go wrong. Someone to take clear responsibility.
Get the end users to understand and appreciate the advantages of crypto currencies that are not being provided by existing currencies. Explain this in ways that a normal lay man person understands.
Make them more inflationary-This could happen by removing the existing caps and letting the markets dictate production. Find ways to make it the currency of operation so that demand and supply are driven by the end users.
Make cryptocurrencies adaptable to major economic events to ensure a degree of continuity of economic systems should a major imbalance happen.
Incorporate crypto currencies into the existing fiat systems, to create a glue between the fiat currencies/systems with the digital ones; merge with each other to make the most of advantages of each and mitigate the disadvantages.
Quantum computing, to eliminate possible threats that come from security breaches in the cryptocurrency network.
Solve computer security, perhaps through biometric identification for user verification to avoid cryptography bypass and hacking into the networks at their points of weakness.
Regulating blockchain/crypto currencies.
Poolers/Bitcoin miners should create a legislative or compliance body which can come up with standard operating policies and procedures across the crypto networks, from a technical point of view so that realistic expectations and realistic rules are set. This would bring us back to the centralized control issues, which the “artistic” techies care so much about, but since they’re going all public and commercial with it, I don’t suppose they really should be fussy given they are all going commercial now and need to adjust to the commercial scene.
Set up a Superior, independent, incorruptible governing body that is genuinely impartial to monitor and govern the activities of the blockchains and bitcoin networks, and not limit this to individual states as this will leave room for the same issues facing current fiat systems that are trying to be eliminated.
Regulators should not try to curb or totally burn out crypto currencies and label them all bad. Most of the bitcoin mining is happening back doors anyway and trying to stop and prevent it completely will be more like the war on drugs.
Create clear legal guidelines that should abound across the platform to avoid bitcoin miners and traders going off with the end users’ investments should something happen. Someone should be liable and take responsibility should things break down or should legal scenarios arise.
There should be an integration of reflagged clients or persons/bodies into the blockchain/bitcoin networks so as the systems flags or blocks potentially illegal activities from being facilitated via the platform. If you have mining pools voting on fraudulent transactions or setting up governing rules on blockchain and crypto currency traders, this could increase trust both from the public and from governments that are necessary if this is to be taken up on a wider scale.
Focusing adaptability to current environment, for example mobile payment systems, setting regulations/ improvements along those lines and growing what’s already there instead of reinventing the whole wheel. Gauge current operating areas where integration of aspects of digital currencies and blockchain can be integrated.
Documentation and clear guidelines on what’s going on in the back end or policies across all blockchain and cryptocurrency platforms/pools. This will not only phase out the potential pyramid schemes, it will also make sustainability of the networks possible for training purposes and for business continuity.
The benefits and feasibility of cryptocurrencies are all in an idealistic setting and should they be brought to applicability, that would be advantageous and beneficial to various stakeholders. However, if left unchecked, this growing crypto-mania could be hugely destructive to its underlying technology, blockchain, which if well positioned could revolutionize various industries.